Sonic Earnings Call Insights: The Comp Explained and Margins Outlook

Sonic Corporation (NASDAQ:SONC) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

The Comp Explained

Nicole Miller – Piper Jaffray: One quick numbers question. In terms of the comp, I think you talked about 3% price right now. Can we understand the rest of the comp to be mix and traffic, and could you specifically call out if you are benefiting from positive or negative mix as well as traffic?

Stephen C. Vaughan – EVP and CFO: Yes, Nicole, we are seeing the majority of our same-store sales growth is coming from a combination of price and mix, so our traffic has been basically just maintaining at existing levels, so relatively flat.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Nicole Miller – Piper Jaffray: And that’s where if you back out the leap year it would be up and would be into the slightly positive territory then?

J. Clifford Hudson – Chairman, President and CEO: At Company drive-ins. That’s correct.

Nicole Miller – Piper Jaffray: And then a big picture question, if you look at the limited service arena, so not just QSR and not just fast-casual, but the whole limited service umbrella, I’m going to ask about loyalty programs. Traditionally, QSR hasn’t had them, but fast-casual has, and more recently they are becoming more popular even in some of the limited, more the QSR-type concepts. Is that something that you would consider doing in the future, and if so, how would you do it?

J. Clifford Hudson – Chairman, President and CEO: Well, I’ll treat that as two questions. First is, would we consider doing it and the answer is yes. We are exploring that now and developing that now. So, as we reach the point where we’re ready to roll that out in a public format, we will share that with you. We do think it as a place in our business and we have many very regular customers and so it makes sense to reward them for being so, but also help drive additional traffic which customers might appreciate that as well. Now as to how we would do that, we are working on that and we’re working on it in a quite focused manner. However, that’s not something that really want to lay out the details of that today. It’ll take a variety of forms over time, but as that evolves and we’re ready to share elements of it, we’ll do that.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Margins Outlook

Matthew DiFrisco – Lazard: Gentlemen, I guess, I am just thinking longer-term, as you’ve talked now a couple quarters about some of the initiatives where you think the point-of-sale system could be a margin driver in the company owned stores, I’m assuming also the pace that you’re talking about throughout the system being rolled out. Could this also be somewhat of more of a traffic driver? How do we look at this as far as your margins are improving pretty quick already without your comp turning around. So the targets you’ve set don’t sound that ambitious, especially given the point-of-sale system that could be pretty meaningful. Are you going to reinvest this potentially so you reach 16%, 17% margins and I think you and the franchisees would rather see a $200,000 of sales at a 16%, 17% margin maybe and start to see some pretty meaningful comp growth and reinvestments help your value position, or is this going to be let’s just drive the margin as much as we can and I’m wondering how do you balance out as far as reinvesting and giving some of that value back to the customers, if you could speak to that.

J. Clifford Hudson – Chairman, President and CEO: Well, we continue to look at ways to refine our offering, you might say, and part of that’s service, part of it’s food, but part of it also relates to other ways we’re working to improve the engagement of a customer. So even as our profitability improves, there are additional ways, Matt, that we are looking to improve the customer experience, so it’s not just a question of improving margins and keeping the experience constant. Your next question was going to be, well, could you lay out what those approaches of engagement would be, and my answer to that would be much the same as it is on the loyalty program question a moment ago that Nicole asked and that is in the near term as we look to what those initiatives are, I should say we are ready to discuss those. We will lay it out for you, but I think your – it’s an interesting question. You are right to ask how are we looking at ways to in essence improve the customer. We might say engagement, but I think from the customer standpoint, we’d say the customer experience and elevate the results of what’s occurring at the drive-in. I’m not sure that I am having a more specific answer for you than that, but it’s an interesting question, one we are actively exploring…

Matthew DiFrisco – Lazard: I guess, maybe a good problem to have if you are already at those targets. Now that 16%, 17% by the time you start rolling out the point-of-sale system, so you would be going north of those targets, I would assume. I guess, just also as a follow-up, I think it was Steve that reiterated the guidance for slightly more openings and I guess the inference is there that’s slightly net openings as well. I think you had some time to explain that the closing, that’s not a pace that you would expect. So, I guess what was going on behind that? Was it just that you got to – its best during the winter time to close some of those stores down and we are not going to see 3Q and 4Q (degree of) closings, because I think 4Q was a pretty heavy closing period last year. So, is that just baked into assuming that better positive comps are going to keep those stores open or would you know already right now what type of closings you would have for 4Q coming down the pipe?

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Stephen C. Vaughan – EVP and CFO: Matt, yes, so it’s a couple of things. One, we do anticipate that the closings over the winter month would represent the majority of the closings. We are able to for the most forecast when the closings will occur based on communications with franchisees and just monitoring their financial results. So, at the end of the day, yes, we do expect to have a more net openings this year than last year.